Monday, May 14, 2007

Is It Real, Or Make Believe?

Past performance is no guarantee of future performance or, if it happened last time it may not happen next time. I read an interesting piece over the weekend that gave clarity to some thoughts I have been pondering recently about the Precious Metal markets. What if most of the gold bugs are afraid of "deja vu all over again" in regards to the May 2006 top in the Precious Metals. This piece posted by Howard Katz on GoldSeek questions the fear that these markets are about to tank again.

The Theory of the Fake-Out Move

May 11, 2007, 1:00 pm (Eastern Daylight Time)

The decline of May 8-10 was a false move, a trap. Gold is set to go sharply higher, and this decline is a wonderful buying opportunity. This is the conclusion which follows from my theory of the fake-out move.

Whenever any market has an important move which leaves a dramatic impression in traders’ minds, the prime condition has been met for a fake-out. Most of the time this move will be a decline, but this is not essential.

If at a later time the market superficially resembles the dramatic move but the fundamentals are pointing in the opposite direction, then the secondary condition has been met for a fake-out move.

The classic case of a fake-out move occurred in mid-October 1989 in the stock market. This was very close to the second anniversary of Black Monday. The market had recovered all of its ’87 loss and was back to its Aug. ’87 high of 2700. So two superficial conditions were the same: date and market level. However, the fundamental condition which determines stock prices (the movement of bond prices and hence interest rates) was exactly the opposite. In 1987, the Fed was tightening, and bonds were going down. In 1989, the Fed was easing, and bonds were going up. On the Friday before the 2nd anniversary, the stock market swooned as people who believed that there would be a reenactment of Black Monday rushed to sell. On Monday, stocks opened lower; there was great fear. AND THAT WAS THE BOTTOM.

The dramatic event which has been hanging over the gold market for the past year is the decline which started on May 12, 2006 and carried to June 14, taking $160 off the gold price in a month’s time. As of May 8, we were within hailing distance of the May 11, 2006 high thus giving us agreement with two superficial conditions (date and market level). However, at the present time the fundamentals on gold are very different from a year ago.

A year ago, traders had enormous profits in gold. When central bank selling hit the market, it sunk like a rock. But today that profit taking has been done, and we are ready for another leg up in the very long term trend. Over the past two months, the central banks have again tried to put gold down, but the gold market, up to now, has absorbed their selling.

So when we see the gold market swoon as May 11 approaches, this is very like the stock market’s swoon on the Friday before the second anniversary of Black Monday in 1989. It is a time to buy.

Such swoons generate a great deal of fear. But you should not be afraid. Reason tells us that this is nothing more than a fake-out move, and this is an opportunity to be aggressively bullish.

For more of my thinking and information about my newsletter, The One-handed Economist, please visit my website,

An interesting "theory" to be sure. Certainly the fundamental reasons for Gold and Silver to move higher are substantially more powerful today than they were one year ago. The market to date has absorbed about 100million ounces of central bank gold selling so far and only showed sings of cracking as we reached the anniversary of the last major top in Gold without a new high.

The Blanchard Economic Research Unit has kept us up to date on these central bank gold sales and commented Friday:

What is important is that we have this data now which gives a firm explanation of why the market is having trouble moving higher. Unfortunately, the market will continue to come under this supply increase pressure until it becomes clear that the selling has slowed down. The real positive to take away from these increased sales is that the market is struggling to consume the additional physical supply, but it's not breaking underneath this pressure. May of 2006, the market broke under less pressure. We're not seeing that at present.

As a new week dawns, oil is back above $62, and the dollar is looking down. Every morning I ask my self, "Who would buy the US Dollar?" The answer is always the same, "Weak shorts." There is no good reason to buy the US Dollar, and no amount of central bank intervention will change that fundamental of today's Precious Metals equation. Until "real" buyers come into the dollar, it's future is bleak.

Looking at The Big Picture, Gold is technically much sounder today than it was one year ago. The uptrend of of the June 2006 lows has been much stronger technically than last years parabolic rise. Catastrophe "should be" averted this time around. As always, only time will tell.

Silver Resistance: 13.15 / 13.25 / 13.39

Silver Support: 13.10 / 13.03 / 12.92

_______________________________All prices SPOT

Gold resistance: 674 / 676 / 681

Gold Support: 672 / 668 / 666

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